Investing does not have to be as complicated as some make it out to be. Each time I evaluate a potential investment I ask myself some basic questions. This has helped me buy winners and avoid losers over the long haul. I don’t care if it is during a bear market or a bull market.
The questions are:
- Have earnings been growing in the past 3-5 years?
- What are the prospects for continued earnings growth?
- Does this business have a good gross margin and net margin (margin is the percentage of the dollars a business gets to keep to reinvest or give to shareholders via dividends or share buybacks.) If a business has a net margin of 30%, then $30 of every $100 they receive is a good thing for that business. If the margin is 5%, then they only get to keep $5 of every $100.
- Are they paying their shareholders via growing dividends? At what average percentage?
- Can they afford to continue this process so that I get a raise every year (are the earnings growing?)
This morning I sold our shares of GLW, a good company, and bought more shares of PAYX, which is an even better company. The GLW shares were up substantially, so I locked in the profits. The picture shows the answers to questions 4 and 5 above. And yes, PAYX has a better net margin than GLW and PAYX is in software and services rather than hardware like GLW.
Net margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue.